Read this case study and complete it, and you need to make a cash flow statement first. Please make sure all correct.
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Youre the CFO of the tech company, BubblePop. Your CMO (Chief Marketing
Officer) is proposing a new product called APPKiller that will be sold online for
$10 per unit. The CMO expects sales of 100,000, 110,000, 120,000, 90,000
and 70,000 units over the products 5 year life. COGS is 20% of sales and
operating expenses are estimated at $350,000 per year. The companys tax
rate is 30%.
The initial investment in the project is as follows.
? $1,000,000 for fixed equipment machinery
? $200,000 in initial raw materials
The machinery is depreciated over 8 years straight-line ($125,000 per year).
At the end of 5 years, the product is expected to become obsolete. The
machinery will be sold off for $600,000 at that time. Raw materials will be
sold off netting the company the $200,000 back that they had originally
FYI, the company has already spent $75k on an overpriced consultant last
year analyzing this deal. (I heard he was a college professor in RI).
Oh, and about their WACC
? The companys stock is trading for $20 per share. There are 50,000
shares outstanding. Company beta is 2.0. The market risk premium is
6% and the risk free rate of return is 3%.
? Corporate debt matures in 4 years and is trading at 90% on 800 bonds
with a par value of $1,000. The coupon rate is 10%. The bonds pay
coupons semi-annually (2x per year).
? The company has a small amount of Preferred stock. 2,000 shares
trading at $90. Par value is $100 and annual income on the Preferred
stock is 9.5%.
Using NPV, should the company invest in the APPKiller project?
Initial Raw Materials
Machinery Sale Net Price
Total Cash Flows
Market Value % of total
Use NPV Function to find PV of Cash Flows
Purchase answer to see full
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